Beware of alternative to security deposit

October 15, 2010|By Janet Portman | Rent It Right

Q. The rental property I'm thinking of living in has offered me an alternative to a security deposit. I pay for a bond, whose premium is less than a full security deposit, but even if I leave owing no rent and no damage, I don't get the money back. Isn't this a violation of the security deposit law?

A. Your landlord has signed up for a new alternative to the tried-and-true practice of requiring a refundable deposit from renters. As you know, classic deposits are just that, money that's returned to tenants as long as they leave the rental undamaged and have paid all of their rent.

But not all innovations are improvements. And it's not hard to see what's wrong with this new model: You never get your money (the price of the bond) back, even if you've paid all your rent and leave the place spotless. In addition, if you do leave damage or unpaid rent, you'll have to reimburse the bonding company for whatever money they had to fork over to the landlord to cover those sums.

It's easy to see why landlords love this arrangement. They don't have to haggle with tenants over deductions. They simply submit their expenses to the bonding company and get paid. They can advertise "No Security Deposit," though they might be wise to add, "Bonding fee required." The messy business of accounting for deposits and refunding balances is off their list too.

But is this process legal? In states that regulate the collection and use of fees, maybe not. Some states, including California, Hawaii and Montana, insist that all fees be refundable. In others, such as Arizona and Utah, nonrefundable fees must be specified as such in writing. In these states, collecting the bond fee might violate the rules, even though the bonding firm, not the landlord, is collecting.

The marketing glitz used by bonding companies reminds me of payday loan ads. They're about having money available to you now. The bonding companies tout the advantages of not having to pay a full deposit ("You'll have money for furniture, a bigger apartment, a health club membership!"), but buried in the frequently asked questions is the unpleasant news that later on you will be billed for any unpaid rent or damage. And even if you leave without any deductions, you will lose the premium. And the deposit may not cost much more than the premium.

Perhaps the most troubling aspect of this scheme is your inability to deal directly with the landlord if you don't agree with his use of the bond.

For example, what if you learn, after you leave, that the landlord has tapped the bond for repairs that you feel were not justified or for rent that you already paid? Normally, you'd contest the landlord's use of your deposit in small claims court. How do you fight it when it's the bonding company, not the landlord, who is demanding that you reimburse them? If you don't pay up, presumably they will sue you, and that puts you at a disadvantage.

Depending on the fine print in the agreement, you might have to show up at a courthouse that's convenient to them, for example, or submit the matter to binding arbitration.

If you can afford it, offer to pay a normal security deposit. You'll be assured that the sum should be returned to you if you leave without damage or unpaid rent; and you'll know that you can challenge the landlord directly if the deposit isn't returned fairly.